Motley Fool Hidden Gems Investing - London Calling Microsoft

Episode Date: December 12, 2022

A new 10-year deal with the London Stock Exchange sends shares of Microsoft higher. (0:21) Jason Moser discusses: - The "win-win" deal between the two sides - How cloud services like Azure and AWS are becoming utilities - The short, not-so-happy public life of Weber Grill - Peter Lynch's advice being a starting point (not a finish line) for investors (12:30) Ricky Mulvey talks with Eddie Alterman, host of the "Car Show" podcast, about the used car market and how GM is competing with Ferrari. Stocks mentioned: MSFT, LDNXF, AMZN, GOOG, GOOGL, WEBR, COOK, GM Holiday Music: Sugar & Booze by Ana Gasteyer Host: Chris Hill Guests: Jason Moser, Eddie Alterman Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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BetMGM operates pursuant to an operating agreement with iGaming Ontario. London Stock Exchange. The deal calls for the exchange to spend nearly $3 billion over the next decade on Microsoft products. Sounds like most of that is going to be spent on Azure Cloud services. The London Stock Exchange gets a greater use of data and the chance to appeal to a broader customer base in exchange for nearly $3 billion. It seems like a win-win here. Yeah, I mean, it definitely feels like it's a good thing for both companies. I mean, when you look at it in the grand scheme of things, right, I think it's in agreement over 10 years to spend a minimum of $2.8 billion on cloud-related products with

Microsoft. So, if you stretch that out, I mean, you're looking at what, essentially, basically $280 million per year over the next 10 years, at the minimum. And for a company like Microsoft, a business that brought in $203 billion over the last 12 months. Obviously, not terribly meaningful from that perspective. Just from a simple numbers perspective, it's a drop in the bucket. When you consider LSE, they brought in around $9.1 billion in trailing 12-month revenue. A little bit different there for them to spend $280 million to $300 million a year. That's a bit more of a commitment for that business. But generally speaking, yeah, it does feel like it's going to work out for both businesses. Interesting for Microsoft,

everybody, I think the thinking here is that this is good for Microsoft as it pertains to Azure, but I think it also gives them an opportunity to continue leveraging the other properties and specialties that they have, namely Teams. This is going to be something that is going to allow them to roll out Microsoft Teams and really embed that into LSE's workflow and continue building capabilities from that platform. Microsoft Teams in this age of Slack and Zoom and working remotely, Teams has certainly proven to be a worthy competitor. I think a lot of the conversation that has, over the last few years, the conversation is certainly centered around things like Slack and Zoom. Teams is a very good platform, a very good product. Having

used it myself, I liked it a lot. I feel like this is a good way for them to continue growing that as well with LSE's 23,000 plus employees. I think all things considered, it's a sensible thing for the London Stock Exchange and absolutely a nice win for Microsoft. Probably can't hurt to make a couple of friends in the neighborhood of, I don't know, Europe's biggest stock market. I'm just thinking from a regulatory standpoint. I'm not saying that's why Microsoft did this deal. I'm just saying it probably is a tiny thing that goes in the plus column. A potential perk, I think maybe we can call it. I don't think it can hurt the cause. I mean, you're right, Microsoft is clearly squarely on regulators' radars

right now for the Activision Blizzard acquisition. Obviously, FTC filing a suit in order to try to stop that deal from happening or at least bring some concessions about. So, it remains to be seen how that all shakes out. But yeah, it does probably give Microsoft a few more friends in a market that would apply to something like this. I agree with you. I can't believe this would be why they did something like this, but I'm sure they probably look at it and think, hey, you know, it's that old saying, Chris, it's not what you know, it's who you know. Well, it feels like maybe they're getting to know a few more people here that could serve them well down the road. And that really, I think, shines a light on the nature of this

relationship being a fairly long one. Ten years is a nice start, so to speak. I don't think that's anything that we should expect to just conclude after 10 years. The nice thing about this is they've got 10 years to really establish this relationship and establish a deep relationship, and you get very sticky. The switching costs grow as you embed yourself with these cloud providers. When you look at the overall cloud market, cloud infrastructure service revenue over the last 12 months totaled $217 billion. Now, if you look at the way the Cloud share breaks down today, you've got Amazon with AWS at 34%. Microsoft is starting to close in there a little bit at 21% with Google and third at 11%. You remember Amazon share used to be higher.

They used to hold the lion's share. Now, you're just seeing more competition and that makes a lot of sense. I think when you look at the length of this relationship, the duration of this relationship, it gives you a little bit more of an idea as to the potential that could develop even beyond 10 years, which I think should be exciting for Microsoft shareholders. Yeah. It's hard to imagine this market, when you lay out those numbers, it's hard to imagine this market getting anything but bigger over the next 10, 20, 30 years. It feels like it. We talk about this from time to time on the team here in regard to just looking at the perspective of utilities. Utilities, people tend to think of water companies, gas companies, power companies,

and the like. I would certainly put cloud providers in that category as the modern-day utility. Now, it's a little bit of a different model and a different way that the finances work there and ultimately these cloud services are part of companies that do other things. But I think it's very fair to look at cloud infrastructure as absolutely a form of utility that's only becoming more and more relevant as time goes on. As they say on, pardon the interruption, happy trails to the public life for Weber Grill. BDT Capital Partners is taking Weber private in a deal worth $3.7 billion. Weber went public in August of 2021, the opening day share price closed at just over $18 a share, and the buyout price is just over

$8 a share. It seems like the best possible outcome, not a great outcome, but the best possible outcome. I think you're right. You've got to give BDT Capital some credit here, helping take the company public. At the time, they were the controlling shareholder in partnership with the Stephen family in management since an investment back to December 2010. BDT is very familiar with this business and ultimately, hey, listen, they took it public for one price and they're getting to buy it back for a much lower price. I'm a little bit torn as to whether, I guess this is probably a good business to own at the right price. I think that grilling and that lifestyle, that's not something that's going away. There's plenty of opportunity

there. I don't know that it's an opportunity that grows to the moon, but I think about this every time I fire up my Traeger, Chris, as I did yesterday when I was smoking some ribs. I threw threw those ribs on there at 12 o'clock, took them off at 7. Chris, they were delicious. I'm not going to lie to you. I had them going over some cherry all day with a little extra pecan in the smoke tube. They were sublime. Now, as I was doing this, I'm thinking to myself how much I enjoy not only the finished product, but the process. It's just enjoyable. It's fun. But it also reminded me that, man, I don't know that I want to be an investor in one of these companies. And the main reason is because the product's so darn good. I mean, I hope this is

last Traeger I ever had to buy. It's the first one. My family got it for me as a gift last Christmas. It is very well-made, and if you take care of it, I think it can last a really, really long time. You and I were talking earlier today. We both have gone through the experience. You have grills for 15, 16, 17 years. That's not prompting a bunch of repeat purchases, is it? It's not, and it's a mistake that a lot of investors, myself included, have made, thinking of the great Peter Lynch and his principles around investing, and one of them being, look at the products and services that you're already using in your life. And the mistake that a lot of people make is just stopping right there. It's just stopping with, well, I use this

thing and I love this thing, so therefore I'm going to buy shares of it. It's like, no, that's where the process of investing begins. And then you start to dig in. Once you get the idea, then you start to dig in, well, how is this business and are they making money? And in the case of Weber, have they made a product that is so good and so durable that people don't need to buy another one for 20 years? And if that's the case, and it is the case in Weber Grill, then yeah, not a great investment. I think you put it perfectly there, man. And that is where the process begins. Once you see that, you say, okay, that's the starting point. Now, let me understand how this business actually works. I look at Traeger,

for example, I'm partial to Traeger obviously because I have a Traeger, but I think all of these companies, they do things very well, whether it's Big Green Egg, Traeger, Weber, they make wonderful products. I think what we're starting to see these businesses do is try to figure out how to monetize beyond that great product. Then it boils down to ancillary services, consumables, accessories, things like that. Whether it's meal kits, coming up with new accessories, the nerdier you get about grilling and smoking, the more you love all of those accessories. But then really, I think the consumable side of it. This really comes into play with something like a Traeger just because it's fueled by

those wood pellets. That is something that you have to keep on buying. It's not a gas grill, it's fueled by those wood pellets and you have to buy those pellets in order to use the grill. If these companies can find new ways to grow those consumable offerings and ancillary offerings, they can become more attractive because there is that installed base. There is a switching cost that comes into it. If you buy that Weber, you're probably going to be using that Weber for the next 15-20 years if you take good care of it. Figure out ways to monetize that relationship. I would imagine that BDT Capital, given their history with Weber, they probably have some ideas and I'm sure they'll probably execute on those ideas. It's neat to see innovation in this space.

I sent you that tweet earlier about Traeger partnering up with Whistlepig and that new bourbon barrel wood pellets. I'm going to have to give that a try, Chris. I feel like I'd be letting my family down if I didn't otherwise. But yes, seeing that kind of innovation is pretty neat I think that's going to be the key to these businesses succeeding, is taking that awesome product, that awesome installed base, that razor, and just figuring out new compelling sorts of blades to go with. Jason Moser, thanks for being here. Thank you. Amid all the talk this year about rising inflation, the cost of used vehicles has been steadily

declining. Ricky Mulvey caught up with Eddie Alterman, the Chief Brand Officer of Hearst Autos, to talk about the used car market, surprising storylines of 2022, and one way that General Motors is beating Ferrari. You think the Chevrolet Z06 Corvette can compete with the Lamborghinis and the Ferraris, Detroit is back. Is this because you're a Detroit guy or did Lambos and Ferraris get worse? No, despite my Pistons hat, I think last time we talked, I was wearing a Tigers hat. I can't quite muster the enthusiasm to get a Lions hat. No, I think Detroit has created something with the new Corvette that is fully competitive with Lamborghinis and Ferraris. Corvettes were

always sort of the budget supercar you know they would they would deliver a sort of sometimes equivalent performance of a ferrari or lamborghini or mclaren for a third of the price um but they weren't weren't maybe taken as seriously as some of those european supercars because it wasn't mid-engine and so the big step change that happened with this the eighth generation of the corvette is that the engine moved from the front of the car where the weight is on the the masses on the front wheels to behind the passengers like a true european style supercar and this has been corvette has been threatening to do this for a very very long time they finally did it with the a generation and so it truly is a bona fide mid-engine supercar like a mclaren

like a ferrari like a marghini but it's just a lot cheaper but it has a ton of character it drives great the ride is not harsh the interior is beautiful and i think in many many ways i'd rather have it than a ferrari or lamborghini i think it's a it's a better everyday driver and it's more comfortable to be in that like the transmission is like silky smooth that the seats are great and you know you don't have to worry about the european repair prices and uh you know there's a funny story about lamborghini guys versus ferrari guys and i don't know where where this all fits in but the ferrari person will have had his mind on a car for years and years and years and work toward it and work toward it and finally buy it and keep it for the

rest of his life that's his car whereas the lamborghini person it is said will buy lamborghini is an impulse purchase, and in 18 months, they'll be dead or in jail or broke. An earlier point, which is that the Ford dealerships are now picking up EVs. At a conference in New York, I think this was in March or something, Jim Farley said, quote, we've got to go to a non-negotiated price. We've got to go to 100% online. There's no inventory. It goes directly to the consumer in 100% remote pickup and delivery, end quote. He's bringing the dealerships back, or was he just mad that they were selling cars above MSRP? I don't know if it was either one of those. I think that the dealers really do a lot for America, right? And the franchise laws protect those dealers. But I think ultimately, you know, local politicians get elected by dealers and all their cash. And I don't think dealers are going away anytime soon.

So I think, you know, Farley's provocative and he's trying to push the industry. And, you know, he's he is really, really smart, really dynamic. And I think he's a provocateur in the best possible way. And I think what he was doing is saying, look, you know, Tesla's doing this. They're selling direct. They're getting all the data on their dealers. So the data is what we want. I'm sorry, the data on all their customers. Whereas, in the current system, once the OEM sells to a dealer, that car is counted as sold, and now it's a dealer's problem. And the customer relationship exists with the dealer and the customer, not with the carmaker and the customer.

Well, I think part of it, I'm sure there was stock pressure or investor pressure, which was in 2020 during the pandemic, let's just say, all of these cars were selling above MSRP and it wasn't reflected in necessarily the revenue for the investors in your Fords. So, hey, what's going on? A, why aren't we benefiting that? And you just have angry consumers or angry car buyers, I should say, who are just upset about feeling gouged. You're seeing the same thing in the used car market with the Honda sports sedans that are going for like $10,000 more a year used versus the new MSRP? Yeah. The Civic Type R, the 2021 version, which was the last generation, is going for $50,000, whereas the new car is $43,000. But an interesting point about what you said about Ford,

whereas the investors were not getting you know the returns that the dealers were and it was a simple supply demand equation the car makers because of the silicon chip shortage were not able to produce at the volumes they needed it created tremendous pressure the dealerships toyota was you know usually had like a 30 to 60 day supply depending on the model they would have a 36-hour supply. Things would come on the truck already sold. So, dealers are making money hand over fist. But the carmakers were the ones that were incredibly challenged by this and working hard to pump things out. And so, it really strengthened the dealer's position and gave them a cash hoard that hopefully they're not spending on.

I mean, between us, how much of that was like advertising? Oh, we have to start selling above the manufacturer's suggested retail price because we just don't have any inventory. Well, there was some gouging, but there was just a lot of natural competition there. And look, we're in a cycle where people have to get new cars because like 34% of cars are leased. So the churn is sort of built into the system. So you'd have to either buy it out your lease, which a lot of people did because it was advantageous for them to buy the original residual value where the car on the open market was worth more. But, yeah, I mean, people need new cars. And the interesting thing that you see is even in this supply constrained environment, the volumes are still around 13 million.

And everybody's saying that the natural new car volume is around 17 million, which is a very, very high number. so i think the demand is always uh is always very very strong for new cars especially because we're going through this real kind of once in a century prime mover technology change where we're going to from gas to ev and people are excited in a way that they haven't been about cars in a very very long time you know for a long time the car business was like why can't we be more like the iPod. Why can't we be more like Apple? Now the car business is like, why can't we be more like Tesla? Yeah. Well, there's going to be a huge headwind, I think, especially for new and used cars, which a lot of these companies make their money on financing. They don't make money on

selling the car. And you got interest rates that are, I think, the baseline interest rates around 4% this year. So that means that your car loan is going to be significantly more expensive. move into the move into the price of cars and especially used cars or well i guess new cars are 48 000 on average right now where do you think we are in the used car market because for a new car that's not that's not affordable for most people you can't get a new car not too far behind and the off-lease cars are like the three-year-old cars are really leading to some very very elevated prices because people want to keep up with the technology people want the latest safety stuff it's a huge emotional driver for people so they want the newest cars and those are you know in

the best condition generally they have the most uh feature content and and people want those so yeah average use price is around 35 38 which is insanely high but that is not to say that you know you look a little bit deeper into a car gurus or automation you can go you know you can get something for $15,000, $20,000. A buddy of mine just bought a 15-year-old. There are deals out there. For your money, what are you getting for, let's just say, $20,000 to $30,000 if you were buying a car right now? Yeah, I would get a Lexus GX460. That's a lot of feature content for not a lot of money. You can go off-roading in it. Or get a Miata. Your suggestion is it's either that or Miata? Those are the only two. I was looking at used electric cars, and basically, if you want

something under $30K, your option is the Nissan Leaf. That's it. Yeah, exactly. What are my hopes of buying a decent electric car under $30K in the next five years, do you think? Very high. I think that the costs are moving down. You look at what General Motors is doing with their BEV pricing, it's very very aggressive and um that's why bolt is selling so well i think equinox ev is going to sell great same with blazer i think that they've they've sort of mastered the um the pricing there and you look at what hyundai and uh and kia are doing and they're really aggressive on price but you know the hyundai ioniq 5 which is it's actually a very very big vehicle it doesn't look that big in pictures but it's really big it's sort of the wheel same wheelbase as the

the Palisade, Monroe SUV. That's sort of mid-40s to 50s. So it's above that $30,000 threshold. I want to keep talking trends a little bit because this year, I feel like has been for... You can sound smart about investing-y stuff where it's full of surprises for investors. There's been a lot of surprises for car stuff too. I'll put it this way. On my bingo card, I didn't have Apple, Ford, and Volkswagen delaying their self-driving plans and putting those on the back burner. And Nikola has delivered trucks. Any big surprise storylines stand out to you for this year? Well, yeah. The Nikola one is interesting because the head of that company got busted for fraud and the stock collapsed. And part of that was the bond yield. But Nikola seems to be

back a little bit. But to me, the most interesting story on the product end is that if you were to asked me five years, 10 years ago, where the greatest cars were coming from, I would have said Germany, maybe a little Japan in there. Now I feel like it's Korea and Detroit with the most interesting product. I think what Genesis is doing is phenomenal. You know, their SUVs are incredible. Their electrics have a ton of appeal and the, just the fidelity of the design is so high. I also feel like I never thought that I would drive, growing up in Detroit, in the 80s, I never thought I'd drive a Cadillac that was better than a BMW or a Mercedes. And I'm driving one right now. I'm driving Cadillac CT4V Blackwing that I'd rather drive than a BMW M3, to tell you

the truth. Bills are ringing and a jingling. Folks are mixing and a mingling. If you want to hear more from Eddie Alterman, Season 2 of his podcast Car Show is out now. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening. We'll see you tomorrow. away my blues. Kris Kringle and his reindeer friends, they endlessly amuse. But the best part of the holidays is sugar and booze. I love mittens and skating on the ice. But I

cried right through December mixing naughty with that nice. So pour a nip into that nog Well, can't let it light your fuse Because the best part of the holidays is sugar and booze Wake up, baby, don't you hit the snooze Just forget the headlines and the news Pop a cork, put on your dancing shoes Give me honey and hooch and I'll give you a smooch Let's give those devils their dues

I like cider, but keep it spiked with rum What good's a little drummer boy with no pa-rum-pa-pum-pum Come New Year's Day, we'll all resolve those extra pounds to lose But now's the time we let it rip away, sugar and booze